When the coronavirus pandemic hit, Bauer Group, an industrial compressor-maker based in Munich, tore up its business plan and wrote a new one.
With its big clients in the automotive industry laid low, it pivoted to other, more crisis-resistant customers in research institutes and the healthcare sector, offering them new applications for its cutting-edge helium recovery system. For its energy clients it developed new compressors to generate green biogas. And it invented, patented and rolled out a new filter that removes viruses, bacteria and moulds from the air.
“It helped that we are very diversified in terms of both products and markets,” says Philipp Bayat, Bauer’s chief executive. “We made a virtue out of necessity.”
Philipp Bayat, Bauer Group chief executive, says the company has ‘made a virtue out of necessity’ by diversifying its product range in the face of the coronavirus crisis © Mikhail Metzel/TASS/Alamy
Isabel Schnabel, a member of the executive board of the European Central Bank, agrees that post-pandemic innovation opportunities must be seized © Hayoung Jeon/EPA-EFE
As a result, Bauer now says it could meet the 2020 targets for revenues and orders set before the outbreak of coronavirus — and both are better than its results in 2019. “We’re seeing that some of our markets are already recovering,” says Mr Bayat. “I wouldn’t say we’re euphoric but we’re definitely confident about the future.”
Just like most of its neighbours, Germany has been ravaged by a global health emergency that has left devastation in its wake. It is facing the worst recession in its postwar history, with rising unemployment and collapsing exports and manufacturing output. The mood among Germany’s captains of industry is bleak.
Yet Bauer Group’s experience shows that it could still end up recovering from its downturn far faster than most of its neighbours. While German gross domestic product will shrink by 6 per cent this year, according to the Bundesbank, predictions for the other four big European economies published in recent days by their respective central banks have been much worse: Italy, for example, is set to contract by 9.2 per cent and the UK by 14 per cent, according to the country’s central banks.
Peter Altmaier, Germany’s economy minister, epitomises the cautious confidence in Berlin. “We see a clear positive trend in people’s mood,” he said earlier this month. German companies were planning big investments for later this year, and the government’s €130bn fiscal stimulus would take effect in the coming weeks, lifting business activity.
Germany, he said, will be the “economic locomotive” that will pull Europe and the world out of its coronavirus crisis.
The faith Europe’s largest economy has in its ability to bounce back rests to a large degree on its success in dealing with coronavirus. It recorded far fewer deaths from Covid-19 than other big countries, with its death toll of 8,914 about a fifth of Britain’s: it flattened the curve of new infections faster than its neighbours; its health system was never overwhelmed. And it managed all this without any of the draconian restrictions seen in countries such as France, where for weeks people were not allowed to leave their homes for anything other than essential outings.
French economy and finance minister Bruno Le Maire, right, and German economy minister Peter Altmaier © Annegret Hilse/Pool/AP
The government’s fiscal response also played a huge role, with Berlin releasing a flood of money to soften the impact of the crisis. In the very earliest phase, it launched a €1.3tn “bazooka” of emergency measures that formed a protective shield round most German companies, preventing a wave of insolvencies and the mass lay-offs seen in countries such as the US. Then came the stimulus package to accelerate the post-coronavirus recovery.
But the agility and ingenuity with which Germany’s “Mittelstand” of small and medium-sized companies responded to the pandemic has also proven to be a critical part of the country’s success.
One example is va-Q-Tec, a specialist in insulation based in the Bavarian city of Würzburg. Its thermal panel operations were hit as orders from fridge-makers and other customers fell sharply. So it shifted staff to making more insulated containers, which are used to transport pharmaceutical products and are now in high demand for carrying coronavirus test kits.
The change of focus also helped it to stay open for business, even at the height of the pandemic. “We didn’t have to do any lockdown,” says Joachim Kuhn, va-Q-tec’s founder and chief executive. “We asked all our customers to send confirmation letters saying that we were systemically relevant for healthcare, and that helped us to stay open around the world.” Bauer Group did the same, arguing its air filters were critical for hospitals and clinics.
Indeed, outside the auto industry, Germany didn’t experience anything like the disruption seen in places such as Italy, where all non-essential businesses were forced to close. “Germany’s shutdown was not as deep nor as long as in other countries like Italy, Spain and France,” says Clemens Fuest, head of the Ifo economics institute in Munich.
Most German building sites also kept working through the pandemic, providing crucial support to private sector investment. “A striking feature of the German economy has been the resilience of investment until now,” says Jens Ulbrich, chief economist of the Bundesbank. “That reflects how construction activity kept going, particularly housing.”
Karl Haeusgen, chairman of HAWE, a company that makes hydraulic components and systems for Asian, US and European markets © Christian Kaufmann
He says orders from his Munich factory are already picking up, with strong demand from Japan, South Korea and China, if not the US © HAWE/Stephan Goerlich
When it comes to Mittelstand companies, many were able to weather the storm thanks to the worldwide network of commercial relationships they have established over the past few decades. HAWE Hydraulik, an engineering group in Munich that makes hydraulic components and systems, exports its products to China, the US and the rest of Europe, which were all hit by coronavirus but at different times. The staggered nature of the impact softened the blow.
“In principle, the more diversified my regional customer structure, the more I can spread my risks,” says Karl Haeusgen, HAWE’s chairman. Although the US is still struggling, orders are now flowing in from Japan, South Korea and China. “Those markets have now stabilised and are even growing,” he adds.
Fischer, a maker of wall plugs and car parts based near Stuttgart, tells a similar story. It had to shut production in many of its 49 subsidiaries across 37 countries because of the lockdown measures, and it furloughed hundreds of its 5,000 staff. But its owner Klaus Fischer says its Chinese sites have been “busy for weeks” and it is now enjoying “clear increases in incoming orders, especially in Germany”.
The advantage for Germany is that the world still needs its products. “It’s not as if the markets for German goods at home and abroad were buried alive by the corona crisis,” says Lars Feld, chairman of the German Council of Economic Experts. “They remained intact. And demand for German cars and machines hasn’t gone away.”
A container ship leaves Hamburg port. Germany’s total exports fell 31% in April compared with a year ago © Morris MacMatzen/Getty A different recovery
The immediate outlook is a lot less bleak than it was even a month ago. But Germany’s prospects are not so encouraging over the long term. For some economists, the country’s heavy reliance on exports conceals a potential trap: the post-coronavirus world could prove hostile to open economies, like Germany’s, that depend on free trade, international supply chains and multilateral institutions, amid a burgeoning backlash against globalisation.
“German growth between 2010 and 2019 was largely due to foreign trade, but you won’t see that in the coming years,” says Gabriel Felbermayr, head of the Kiel Institute for the World Economy. “Countries are putting up trade barriers. They’re encouraging ‘reshoring’ by subsidising companies that want to relocate to their home market. China and the US are decoupling. And all that really hurts Germany.”
The rise of China, and its insatiable demand for German cars and machines, was one of the big drivers of Germany’s 10-year economic boom, the longest in its postwar history. Yet China’s economy contracted for the first time on record in the first quarter and “now it’s questionable whether it will grow at all in 2020”, says Mr Felbermayr. Whatever happens, it “won’t have the same pull effect that it had from 2010, in the wake of the global financial crisis”.
There are other looming dangers, too. Ifo’s Mr Fuest points to the rapid upheaval that digitisation will inevitably wreak on German businesses and society, and the impact green policies to mitigate climate change will have on the automobile sector — a key pillar of Germany’s strength. He cites the 800,000 people employed in Germany’s car industry, many of them specialising in building internal combustion engines — skills that risk becoming redundant with the rise of the electric vehicle. “I’m really worried about them,” he says.
Isabel Schnabel, a former economics professor at the University of Bonn who joined the executive board of the European Central Bank in January, says Germany will have to make a “substantial” adjustment to the new, post-coronavirus reality. But it should also seize the opportunities that this provides. “Germany will have the problem that it cannot return to the old normal, but that it will have to find a new normal,” she says.
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The chances are, she says, that in the aftermath of the coronavirus crisis “economic activity shifts towards certain areas that are more conducive to economic growth, like digitisation or towards a carbon-free economy,” she told the FT. “For Germany, that is one of the big challenges, given the relevance of the car industry.”
Already, there are signs that the government realises it needs to seize the opportunity for change. The stimulus it passed earlier this month is built around a big temporary cut in value added tax and a €300 one-off payment for every child in the country: but it also contains a €50bn “future package” of investments in the hydrogen economy, quantum technologies and artificial intelligence.
Meanwhile, the penny has dropped that Germany’s economy will not fully rebound unless Europe as a whole also recovers. That was the reasoning behind the Franco-German proposal for a €500bn post-virus recovery fund financed with debt raised by the EU — an idea long opposed by Berlin — that will help European countries worst affected by the pandemic.
“The fact that Germany is part of the EU means it must carry the financial burden that accrues,” says HAWE’s Mr Haeusgen. “That’s the principle of solidarity.”
Extinction Rebellion protesters in Berlin symbolise the growing pressure on Germany’s government to align economic policy with climate goals © Maja Hiti/Getty Grounds for optimism
Even with dark clouds hanging over the long-term outlook, there is growing evidence that the German economy is already starting to rebound from the pandemic.
The Council of Economic Experts predicted on Tuesday that although Germany’s GDP will shrink by 6.5 per cent this year, it will expand by 4.9 per cent in 2021, with a “slow recovery” setting in this summer.
Monika Schnitzer, a council member, says she has noticed “a marked improvement in mood”. She points to the latest IHS Markit purchasing managers’ index, published on Tuesday, which rose from 32.8 in May to 45.8 in June — its highest level since the pandemic began (though still below the 50 threshold that indicates expanding business activity).
“Electricity consumption is stabilising, the truck toll mileage index [based on the toll payments made by truck-drivers on German autobahns] is up, as are restaurant reservations,” she says. “These are all real-time indicators that provide a good snapshot of the mood and give grounds for optimism.”
The better mood is reflected in the Ifo’s business climate index, which rose to 86.2 points in June, up from 79.7 points in May — the biggest increase on record. Previous Ifo surveys have also reflected a big uptick in production expectations among German companies — particularly in sectors such as furniture, leather goods and footwear.
Trippen, the Berlin-based craft-oriented shoe label, is one of those now beginning to look tentatively to the future. It continued to produce all the way through the shutdown, and received a €60,000 lifeline from its home state of Brandenburg. “It was just astonishing — the money was in my account within two days,” says Michael Oehler, Trippen’s co-founder.
Trippen will be one of many beneficiaries of the slight uptick in consumer confidence that researchers have recorded. A closely watched index, the GfK consumption climate, is showing signs of recovery, having reached a historic low in May. New car registrations, which dropped by 31.5 per cent in March and 31 per cent in April, were up 30 per cent in May. “The shock-induced paralysis is over and a new normality is setting in,” says Peter Fuss, an auto industry expert at EY.
Even still, many companies acknowledge they’ve taken a big hit, and will take time to recover. Mr Oehler expects that Trippen’s orders for the next two-to-three seasons will be 50 per cent down on previous years, that he’ll have to shed 60 of his 120 employees and shell out more than €1m in severance payments. “Bang goes my pension,” he says.
Volkswagen factory, Wolfsburg. Rapid digitisation and green policies could wreak havoc on jobs in Germany’s auto sector which employs around 800,000 people © Swen Pfoertner/Pool/Reuters
Mr Haeusgen says HAWE has also been through the wars: orders are down 20-25 per cent. “We’ve reached a low point, and we’ll stay there for the next two to four months,” he says. Next month, 10 per cent of the workforce will have to be furloughed. Revenues will be down 10-20 per cent this year, year on year. “But things will start to bounce back at the end of September,” he says.
HAWE will, he insists, recover more quickly than it did after the global financial crisis. “The 2009 downturn hit manufacturing much harder than the corona crisis did,” he says. Economies with big service sectors — Spain and Portugal with their tourism industries, for example — will suffer. “But for us, 2020 will definitely not be as bad as 2009.”
For Mr Altmaier, it is the strength of German exports that is key to the country’s resilience. “Since the rise of the Phoenicians more than 2,500 years ago,” the economy minister said earlier this month, “export-oriented, networked, interactive economies have always proven to be much more prosperous and successful, and had stronger growth, than autarchic societies which cut themselves off from the outside world.”
The hope is that it is precisely this openness that will help Germany’s economy to revive — and reverse the deep losses suffered in the pandemic.